McVeigh v. Recology San Francisco

Facts

Two whistleblower statutes framed the appeal. The first was the retaliation provision of the California False Claims Act (CFCA; Gov. Code, § 12650 et seq.), which at the relevant time provided: “No employer shall discharge … or in any other manner discriminate against, an employee in the terms and conditions of employment because of lawful acts done by the employee … in disclosing information to a government or law enforcement agency or in furthering a false claims action, including investigation for … an action filed or to be filed under [the CFCA].” (Gov. Code, former § 12653, subd. (b), italics the court’s; quoted at McVeigh, supra, 213 Cal.App.4th at p. 455.) The second was Labor Code section 1102.5, subdivision (b) — “California’s general whistleblower statute” — which then provided: “An employer may not retaliate against an employee for disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or a violation or noncompliance with a state or federal rule or regulation.” (McVeigh, supra, 213 Cal.App.4th at p. 468.)

Brian McVeigh began working for Recology — the company that “provides waste collection, recycling and disposal services to San Francisco residents and businesses” — in 2000. (McVeigh, supra, 213 Cal.App.4th at pp. 447–448.) From late 2004 he was an operations supervisor at Pier 96, where recyclables are sorted for processing and sale. Recology also ran two “buy-back” centers, at Pier 96 and on Tunnel Road in Brisbane, where attendants weighed customers’ recyclables, wrote the weight on a tag, and a cashier paid the customer the California redemption value in cash for the tagged weight. (Id. at p. 448.) Recology aggregated recyclables from all sources, commingled them into bales, and shipped them to third-party purchasers with a form DR-6 showing the weight; purchasers verified weights on a form DR-7; and both forms went to the Department of Conservation, which reimbursed Recology the CRV — at a higher rate for buy-back-center material than for curbside collection. (Ibid.)

The fraud at the center of the case was “tag inflation,” which “occurs when an attendant records more weight on the tag than the weight of the recyclables actually bought back by Recology, resulting in an overpayment by Recology to the customer, and possibly a kickback to the attendant.” (McVeigh, supra, 213 Cal.App.4th at pp. 448–449.) In September 2005, at a supervisor’s request, McVeigh investigated a tip; the suspected employee admitted the scheme, McVeigh reported it up to the general manager, the police were called, and employees were arrested. That same month McVeigh reported tag inflation at Pier 96 and Tunnel Road to San Francisco Police Officer James Lewis. (Id. at pp. 448–449.) His aggressive style drew friction: employees said he was “witch-hunting” or “stalking,” union members filed grievances, and a manager said he had a “cop mentality.” (Id. at p. 449.)

After McVeigh transferred to Tunnel Road in November 2005, he told operations manager Ken Stewart about his report to Officer Lewis and proposed video surveillance to deter the fraud. In January 2006 Stewart refused the video equipment and ordered McVeigh “to stay out of the CRV Buy Back business” and “only mind … the IMRF” (the industrial material recycling facility). From January 2006 to September 2007 McVeigh did not report his “concerns of CRV theft scams of State funds,” though tips of ongoing fraud kept coming. (McVeigh, supra, 213 Cal.App.4th at p. 449.) In September 2007 he was put in charge of the Tunnel Road buy-back center and told to “straighten out the facility”; he understood his duties to include preventing tag inflation, suspected “management was involved in some type of coverup,” and reported his suspicions to Sergeant Thomas Lynn of the Brisbane Police Department. (Id. at p. 450.)

What followed reads like an escalating audit. Once McVeigh began reviewing daily CRV weight records, the buy-back center’s average daily payout fell from over $13,000 to $7,000. Video surveillance — finally installed in late November 2007 — produced “obvious video evidence that attendant Andre Lewis was engaged in large and repeated weight tag inflation”; confronted, Lewis admitted it and implicated three other employees. (McVeigh, supra, 213 Cal.App.4th at p. 450.) By January 2008 the daily payout was under $5,000, and McVeigh suspected “massive” “CRV theft” was continuing. Recology rejected his recommendation to hire a private investigator, and it declined a Brisbane police investigation that would have required Recology to agree to press charges. (Id. at p. 451.) Accounting records deepened his concern: in November 2007, over seven tons less aluminum arrived at Pier 96 (16.56 tons) than had been purchased at Tunnel Road (23.60 tons). (Ibid.)

On February 4, 2008, McVeigh filed an online “EthicsPoint” report — transmitted to senior management and Recology’s board of directors — alleging that employees had engaged in tag inflation and that managers knew but had not fixed it. Two weeks later, Stewart called McVeigh into a supply room, locked the door, and “threatened [McVeigh] with being fired for continuing to push the issue of CRV fraudulent theft.” McVeigh reported the confrontation to human resources and continued raising “fraudulent theft of CRV funds.” (McVeigh, supra, 213 Cal.App.4th at p. 451.) He also reported a suspected “ ‘truck theft scam’ ” — employees conspiring to off-load CRV recyclables in transit and resubmit them for a second refund — and reviewed truck logs showing, for example, a February 25, 2008 run that left Tunnel Road with 2,340 pounds of aluminum and arrived at Pier 96 thirty-seven minutes later with 1,920 pounds. (Id. at p. 452.) In his summary judgment declaration he explained: “I became extremely concerned that management did not want a real inquiry into the CRV theft issues, and that my job was being threatened for doing what I thought was something I needed to do in my job both for the company and to protect public funds in the State CRV program.” (Ibid.)

A human resources investigator’s report dated May 13, 2008 recommended that McVeigh “be separated from this organization immediately.” It found he had a “headstrong attitude,” “stir[red] up gossip, arguments, and conflicts on a regular daily basis,” and that his “peers and supervisors made a point of avoiding him”; his many allegations, the report concluded, could not be substantiated. McVeigh was placed on administrative leave that day, and general manager Mike Crosetti — concluding the allegations were made in bad faith — terminated his employment on May 28, 2008. (McVeigh, supra, 213 Cal.App.4th at p. 453.)

Procedural history

McVeigh sued Recology in August 2009 on five causes of action: two for wrongful termination in violation of the CFCA whistleblower statute (Gov. Code, § 12653); one for termination in violation of public policy; one for termination in violation of Labor Code section 1102.5, subdivision (b); and one for breach of an implied contract not to be discharged without good cause. (McVeigh, supra, 213 Cal.App.4th at pp. 453–454.) The trial court granted Recology summary judgment. It reasoned that the whistleblower claims failed because McVeigh was merely performing his “regular job responsibilities” in investigating and reporting weight-tag inflation — so Recology did not know he was engaged in protected activity — and that causation failed because he was not fired until almost three years after he first blew the whistle; the public-policy claim fell with the statutory claims. (Id. at p. 454.)

McVeigh appealed everything but the implied-contract ruling. (McVeigh, supra, 213 Cal.App.4th at p. 454.) Reviewing de novo and viewing the evidence in the light most favorable to the opposing party (ibid.), the Court of Appeal reversed the judgment on the second (CFCA), third (public policy), and fourth (Labor Code) causes of action, affirmed on the first (CFCA) and fifth (contract), vacated the discovery ruling insofar as it denied McVeigh the identities of witnesses interviewed in the employer’s internal investigation, and awarded McVeigh his costs on appeal. (Id. at p. 475.)

Issue

The court framed the questions at the outset. On the CFCA claims: “we will discuss whether the state was harmed by the alleged fraud reported by McVeigh and whether his report of possible fraud was protected conduct under the statute.” On the Labor Code claim: “we will consider whether the statute protects an employee from discrimination for reporting illegal acts by fellow employees or only illegal acts of his or her employer.” (McVeigh, supra, 213 Cal.App.4th at pp. 447–448.) Embedded in the CFCA analysis were two further summary judgment questions: whether an employer can defeat the knowledge element because a “fraud-alert” employee was just doing his job, and whether a multi-year gap between the first report and the termination defeats causation as a matter of law. (Id. at pp. 465–468.)

Holding

Reasoning

The CFCA is read broadly, but always in service of the public fisc. The court began from the CFCA’s design: it “permits the recovery of civil penalties and treble damages from any person who knowingly presents a false claim for payment to the state or a political subdivision,” and its retaliation provision “plainly should be given the broadest possible construction consistent with that purpose” — the purpose being “to prevent fraud on the public treasury.” (McVeigh, supra, 213 Cal.App.4th at pp. 454–456.) Under Kaye v. Board of Trustees of San Diego County Public Law Library (2009) 179 Cal.App.4th 48, an employee need not file a qui tam action or show an actual false claim, but “the employee must have reasonably based suspicions of a false claim and it must be reasonably possible for the employee’s conduct to lead to a false claims action.” (McVeigh, supra, at p. 456.) Because the CFCA is patterned on the federal False Claims Act, federal authority guides its interpretation. (Ibid.)

The first cause of action fails because the pleaded fraud injured only the employer. McVeigh’s first cause of action rested on customer/employee tag inflation as fraud in itself — “regardless of whether Recology subsequently defrauded the State in seeking reimbursement.” (McVeigh, supra, 213 Cal.App.4th at p. 456.) The court walked through his own hypothetical: a customer presents 50 pounds of aluminum; the attendant writes a tag for 100 pounds; the customer pockets a doubled refund; Recology reports the correct weight to the state and is reimbursed accurately — so “Recology was the only money loser.” (Id. at pp. 457, 461.) Adopting the reasoning of Hutchins v. Wilentz, Goldman & Spitzer (3d Cir. 2001) 253 F.3d 176 — which held the federal act “only prohibits fraudulent claims that cause or would cause economic loss to the government” — the court concluded that inflated weight tags that never reach the state are not “a false record or statement material to a false or fraudulent claim” against the state. (Id. at pp. 458–460.) That the fraud injured a company that helps the government achieve its recycling objectives did not matter: there is a “distinction between whether a claim was made against the government and whether the government was injured by the alleged fraud.” (Id. at p. 460.) U.S. ex rel. Yesudian v. Howard University (D.C. Cir. 1998) 153 F.3d 731 was distinguishable — Recology sought reimbursement from the state, no showing made it a state-sponsored enterprise, and Yesudian itself confirms a false claim must ultimately produce a loss to the government. (Id. at pp. 460–461.)

The second cause of action survives: a genuine, reasonable concern of possible fraud on the state is protected conduct. The second cause of action alleged Recology “presented false claims to the state.” (McVeigh, supra, 213 Cal.App.4th at p. 462.) Because buy-back and curbside materials were commingled before shipment, the state had to rely on Recology’s DR-6 forms to compute the premium buy-back reimbursement; if the buy-back weights on those forms derived from inflated tags, “Recology would receive an excessive refund.” (Ibid.) Operations manager Joe Damele testified that the buy-back weights reported to the state came “[t]hrough the tags that they received from buying the material from the public” — testimony Recology ultimately conceded, in a supplemental brief, “[c]onstrued in McVeigh’s favor … states that Recology used weight tags prepared at Pier 96 to report the weight of CRV material collected at the Pier 96 Buyback Center.” (Id. at pp. 462–463.) Critically, the court rejected the parties’ shared premise that the plaintiff must uncover an actual false claim. Kaye’s “reasonably possible” requirement “simply means that there must [be] a reasonable basis for the employee’s suspicion about fraud on the government—not that actual grounds for a false claims action must have existed.” (Id. at p. 463.) Federal law accords: protection turns on whether “ ‘(1) the employee in good faith believes, and (2) a reasonable employee in the same or similar circumstances might believe, that the employer is committing fraud against the government.’ ” (Id. at p. 464, quoting Fanslow v. Chicago Manufacturing Center, Inc. (7th Cir. 2004) 384 F.3d 469, 480.) McVeigh’s declaration supplied the subjective component, and his knowledge that Recology reported buy-back weights on DR-6 forms, was reimbursed by the state, and received premium buy-back rates made his suspicion objectively reasonable — “McVeigh’s declaration was alone sufficient to raise an issue of fact,” whatever the truth about Tunnel Road’s reporting practices. (Id. at pp. 464–465.)

The “fraud-alert employee” doctrine: a heightened notice standard, adopted — and met. The trial court’s core rationale was that McVeigh was just doing his job, so Recology lacked notice of protected activity. The Court of Appeal engaged the federal line recognizing “ ‘fraud-alert’ employee[s]” — those “charged with discovering fraud in the normal course of their job duties” — who face a “heightened notice standard” because an employer naturally assumes such an employee “is doing his job, not warning of a lawsuit.” (McVeigh, supra, 213 Cal.App.4th at p. 465.) Under Eberhardt v. Integrated Design & Construction, Inc. (4th Cir. 1999) 167 F.3d 861, “if an employee is assigned the task of investigating fraud within the company … the employee must make it clear that the employee’s actions go beyond the assigned task,” and notice may come from characterizing malfeasance as “illegal or fraudulent” or threatening to report it to government officials. (Id. at pp. 465–466.) McVeigh’s public-employee authorities — including Mize-Kurzman v. Marin Community College Dist. (2012) 202 Cal.App.4th 832 and Colores v. Board of Trustees (2003) 105 Cal.App.4th 1293 — were “inapposite” because Recology is a private employer. (Id. at p. 466.) The court then split the difference in a way that decided the appeal: “We are persuaded by the federal cases that hold fraud-alert employees should be held to a heightened notice standard, but agree with McVeigh that he could be found to have met it.” (Id. at p. 467.) He reported to law enforcement as well as to Recology, used terms like “embezzlement,” took his concerns “all the way to Recology’s board of directors,” and “secured an offer from the police to investigate the matter, which Recology declined to pursue.” A jury could find Recology understood he was warning of possible litigation, not merely doing his job. (Ibid.)

Causation: an employer’s stand-down order resets the clock. The trial court had measured the causal gap from McVeigh’s first 2005 report to his 2008 firing. But McVeigh was ordered in January 2006 to ignore tag inflation, obeyed until September 2007, then renewed his investigation and took the matter to the board in February 2008 — and was fired three months later, “after rocking that boat.” (McVeigh, supra, 213 Cal.App.4th at pp. 467–468.) “The gap could be viewed as eight months, from September 2007 to May 2008, or three months, from February 2008 to May 2008—relatively brief intervals that could support an inference of causation.” (Id. at p. 468.) And there was direct evidence too: the locked-supply-room threat that he “could be fired if he pressed on with his concern about possible CRV fraud,” three months before the termination. (Ibid.)

Labor Code section 1102.5(b) reaches reports of coworker and third-party illegality. Turning to the fourth cause of action, the court invoked the statute’s “broad public policy interest in encouraging workplace whistle-blowers to report unlawful acts without fearing retaliation” (McVeigh, supra, 213 Cal.App.4th at p. 468, quoting Green v. Ralee Engineering Co. (1998) 19 Cal.4th 66, 77), and the rule that protected activity means disclosure to a governmental agency of “ ‘ “reasonably based suspicions” of illegal activity.’ ” (Id. at p. 469, quoting Mokler v. County of Orange (2007) 157 Cal.App.4th 121, 138.) McVeigh “clearly had a reasonable basis for suspecting tag inflation fraud because Recology employees had been caught doing it.” (Ibid.) Recology’s central argument was statutory: an uncodified preamble to the 2003 amendments speaks of encouraging employees to notify the government “when they have reason to believe their employer is violating laws.” The court held the preamble “cannot properly be read to limit the reach of Labor Code section 1102.5, subdivision (b) to reports of employer misbehavior”: the statute “by its terms protects reports of unlawful conduct,” pre-2003 case law — Gardenhire v. Housing Authority (2000) 85 Cal.App.4th 236 — protected a whistleblower who reported a fellow employee and a contractor, and the 2003 amendments made no substantive change to subdivision (b). (Id. at p. 470.) Patten v. Grant Joint Union High School Dist. (2005) 134 Cal.App.4th 1378 was distinguishable: its disclosures “encompassed only the context of internal personnel matters,” whereas McVeigh took reports of illegal conduct to law enforcement. (Id. at pp. 470–471.) Construing the statute broadly “commensurate with its broad purpose,” the court concluded that section 1102.5(b) “protects employee reports of unlawful activity by third parties such as contractors and employees,” adding a practical rationale: “an employer may have a financial motive to suppress reports of illegal conduct by employees and contractors that reflect poorly on that employer.” (Id. at p. 471.) The job-duties and timing rationales failed here for the same reasons as under the CFCA — and, independently, a report can be protected under section 1102.5(b) “even if she ‘ “was simply doing her job” ’ in making the report.” (Id. at p. 469, quoting Patten, supra, at p. 1386.)

The Tameny claim rises and falls with the statutory claims — but only the public-funds theory supports it. Because the second CFCA cause of action revived, so did the claim for wrongful termination in violation of public policy: “Fundamental public policy prohibits the retaliatory discharge of employees for whistle blowing in the public interest,” and the plaintiff “need not prove an actual violation of law; it suffices if the employer fired him for reporting his ‘reasonably based suspicions’ of illegal activity.” (McVeigh, supra, 213 Cal.App.4th at p. 472, quoting Green, supra, 19 Cal.4th at p. 87.) In a footnote of real practical consequence, the court observed that a report to law enforcement of fraud on Recology alone would support the Labor Code claim but not a Tameny claim, because such fraud “affect[ed] only the employer’s … interest, and not the general public’s interest.” (Id. at pp. 472–473, fn. 9, quoting Green, supra, at p. 75.)

A discovery coda under Coito. The court affirmed the denial of McVeigh’s motion to compel notes of the employer’s internal-investigation interviews (the attorney-client privilege ground was unrebutted on appeal), but vacated the ruling protecting the identities of interviewed witnesses: the issue had been litigated under Nacht & Lewis, which Coito v. Superior Court (2012) 54 Cal.4th 480 significantly limited, so any renewed motion must be resolved under Coito’s standards. (McVeigh, supra, 213 Cal.App.4th at pp. 473–475.)

Significance

McVeigh is the leading Court of Appeal authority holding that section 1102.5(b)’s protection is defined by the illegality disclosed, not the identity of the wrongdoer. Before McVeigh, employers routinely argued — as Recology did — that the statute polices only an employer’s own violations. After McVeigh, an employee who reports reasonably suspected crimes by coworkers, contractors, or other third parties to the government stands on the same footing as one who reports the company itself, and the court’s financial-motive rationale (McVeigh, supra, 213 Cal.App.4th at p. 471) explains why that must be so: employers have their own reasons to silence reports that reflect poorly on them. The Legislature moved in the same direction the very year McVeigh was decided: 2013 amendments, effective January 1, 2014, extended subdivision (b) to internal reports to “a person with authority over the employee” and made disclosures protected “regardless of whether disclosing the information is part of the employee’s job duties.” (Lab. Code, § 1102.5, subd. (b), as quoted in Ross v. County of Riverside (2019) 36 Cal.App.5th 580, 591.) That job-duties clause substantially answers, for section 1102.5 claims, the “fraud-alert employee” problem the McVeigh court had to work through under federal CFCA case law — though the heightened-notice analysis remains live authority for CFCA retaliation claims against private employers.

The decision also sits early in the doctrinal arc that produced the modern, employee-protective architecture of California whistleblower law: the California Supreme Court later confirmed in Lawson v. PPG Architectural Finishes, Inc. (2022) 12 Cal.5th 703 that Labor Code section 1102.6 — not the McDonnell Douglas framework — governs the litigation of section 1102.5 claims, and in People ex rel. Garcia-Brower v. Kolla’s, Inc. (2023) 14 Cal.5th 719 it gave “disclosure” a similarly generous reading. McVeigh’s summary judgment lessons are equally durable: the opinion is a working manual on how protected-activity, employer-knowledge, and causation showings are actually assembled at the Code of Civil Procedure section 437c stage — reasonable belief from the employee’s own declaration, notice from reports that name illegality and reach law enforcement or the board, and causation from a properly framed timeline. Its one employer-side anchor is equally clear: a CFCA retaliation theory must ultimately point at the public treasury. Fraud that costs only the company is a matter for section 1102.5 — not the False Claims Act, and not Tameny. (McVeigh, supra, 213 Cal.App.4th at pp. 460, 472–473, fn. 9.)

Key quotes

“We also conclude that the Labor Code protects an employee from discrimination for reporting claims of illegal conduct by fellow employees as well as by an employer.” (McVeigh, supra, 213 Cal.App.4th at p. 448.)

“[T]he plaintiff need only show a genuine and reasonable concern that the government was possibly being defrauded in order to establish that he or she engaged in protected conduct. Any more limiting construction or significant burden would deny whistleblowers the broad protection the CFCA was intended to provide.” (McVeigh, supra, 213 Cal.App.4th at p. 458.)

“We are persuaded by the federal cases that hold fraud-alert employees should be held to a heightened notice standard, but agree with McVeigh that he could be found to have met it.” (McVeigh, supra, 213 Cal.App.4th at p. 467.)

“In support of our conclusion, we note that an employer may have a financial motive to suppress reports of illegal conduct by employees and contractors that reflect poorly on that employer.” (McVeigh, supra, 213 Cal.App.4th at p. 471.)

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Practice pointer

Open questions

The court expressly left several matters undecided. It declined to reach McVeigh’s theory that false claims were also being made on the City and County of San Francisco through the rate-setting process — noting the theory surfaced too late and the only evidence called its effect “prohibitively speculative.” (McVeigh, supra, 213 Cal.App.4th at p. 465, fn. 6.) It found it unnecessary to decide whether McVeigh’s reports of marijuana scavenging by employees independently supported the section 1102.5(b) claim, having sustained the claim on the tag-inflation reports. (Id. at p. 471, fn. 8.) And it reserved how the Tameny claim is affected by revival of the Labor Code cause of action — while flagging, in dicta with teeth, that a report of fraud on the employer alone would support the statutory claim but not the public-policy tort. (Id. at pp. 472–473, fn. 9.) Beyond the opinion’s four corners, McVeigh predates the 2013 amendments to section 1102.5 and the Supreme Court’s decisions in Lawson and Kolla’s; its CFCA fraud-alert analysis has not been revisited by the Supreme Court, and how the heightened-notice standard interacts with the amended Labor Code’s express protection for job-duty disclosures remains a question the courts have not squarely answered.